Face Challenges Confidently

381 BP Am. Prod. Co. v. Marshall

Monday, August 31st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

BP America Production Company v. Marshall, 342 S.W.3d 59 (Tex. 2011) held that, among cotenants, the payment of a royalty rather than a cotenant share is sufficiently hostile to put the cotenant on notice for adverse possession. The case also held that the accrual of a cause of action for fraud is not deferred by the discovery rule and that the statute of limitations for fraud is not tolled by fraudulent concealment when the alleged fraud could have been discovered with reasonable diligence in Texas Railroad Commission (“TRC”)records. Simplified, in the 1970’s BP obtained oil and gas leases on the Slator Ranch, including a lease from the Marshall family (“Marshall”) covering 1/16 of the minerals and a lease from the Vaquillas family (“Vaguillas”) covering 1/4 of the minerals. The leases contained common savings clauses that allowed them to continue beyond the primary term, provided that BP was then engaged in “good faith drilling or reworking operations designed to produce paying quantities of oil or gas with no cessation of operations for more than sixty days.” Two weeks before the expiration of the primary term in July 1980, BP drilled a well. BP continued work on the well throughout the remainder of the year but never achieved production. The lessors inquired about the status of the well and the leases. BP informed them that it was engaged in continuous operations sufficient to satisfy the savings clause and keep the leases in effect. The lessors did not engage in any further inquiries or investigate public records. On March 25, 1981, BP transferred its interest to Sanchez-O’Brien. Sanchez-O’Brien drilled a productive well in April 1981, and later the leases were assigned to Wagner. It was undisputed that all lessees had conducted continuous good faith operations since April 1981.

Suit was first filed in 1997. Marshall conceded that Wagner had acquired leasehold title by adverse possession and went to trial against BP on a fraud claim. Marshall obtained a favorable jury finding on fraud, and the issue on appeal was BP’s statute of limitations defense. Vaquillas settled with BP and went to trial against Wagner claiming that title reverted to Vaquillas prior to the assignment of the lease from BP. The issue on appeal was Wagner’s adverse possession of the leasehold title. Thus, notwithstanding the complications of the differing positions among the parties, the issues on appeal were (1) whether the accrual of the cause of action for fraud was deferred by the discovery rule and/or whether the statute of limitations was tolled by fraudulent concealment, and (2) whether Wagner’s conduct satisfied the requirements for adverse possession.

Under the discovery rule, the accrual of a cause of action is deferred “until the injury could reasonably have been discovered.” The rule is reserved for injuries, the nature of which are “inherently undiscoverable and the evidence of injury is objectively verifiable.” An injury is not inherently undiscoverable if it can “be discovered through reasonable diligence.” Applying these rules, the court concluded that the accrual of the cause of action was not deferred on Marshall’s fraud claim because evidence of BP’s failure to maintain the lease was in the records of the TRC. BP had filed a well log and a plugging report with the TRC and these documents were publicly available. Had Marshall chosen to exercise reasonable diligence, Marshall could have discovered that BP was not making good faith efforts to produce. Therefore, the discovery rule did not apply.

In reaching its holding, the court repeated that the discovery rule is applied categorically and that it is a very limited exception to statutes of limitations. It specifically referred to HECI v. Neel in which it had previously held that the discovery rule would not apply when the necessary facts were available in public records at the TRC. Thus, it now appears clear that the discovery rule will not apply to the “category” of cases where the information necessary to discover the injury is publicly available at the TRC.

Fraudulent concealment is an equitable doctrine which may operate to extend the limitations period, and, unlike the discovery rule, whether or not the doctrine applies is fact-specific. “A defendant’s fraudulent concealment of wrongdoing may toll the statute of limitations after the cause of action accrues.” There was evidence, which the jury accepted, that BP concealed its problems on the lease. Nevertheless, the necessary information was also available at the TRC, a lessor is required to exercise due diligence, and therefore, as a matter of law, the court held that Marshall would have been able to discover BP’s fraud. TRC records will now defeat claims of fraudulent concealment if the necessary facts to discover the injury are publicly available.
In Vaquillas’ suit against Wagner to regain the leasehold, Wagner argued that, even if the lease had reverted to Vaquillas, Wagner had since regained the leasehold interest through adverse possession. The dispute boiled down to whether Wagner’s conduct was sufficiently hostile to put Vaquillas, as cotenant, on notice of Wagner’s intent to oust Vaquillas (ouster as between cotenants).

The court noted that when a lease expires, the former lessor becomes an unleased cotenant. An unleased cotenant is entitled to “the value of the minerals taken less the necessary and reasonable cost of producing and marketing the same.” In Vaquillas’ case, a cotenant share would have entitled Vaquillas to approximately 25% of production. Wagner had only paid Vaquillas a royalty interest of 4.23%. The great disparity between these two amounts and the characterization of the interest owned and the payment as a “royalty interest” in various documents and records (including division orders) was sufficient to put Vaquillas on notice. Accordingly, the court held that Wagner had adversely acquired the leasehold estate.

By accepting a clearly labeled and computed royalty, Vaquillas was on notice that Wagner claimed title to the leasehold — an unequivocal claim to ownership unmistakably inconsistent with and hostile to Vaquillas’s claim of a cotenant relationship. Accordingly, Wagner acquired the same interest it adversely possessed – a leasehold estate as defined by the original lease.

The case is significant because it makes clear that TRC records will generally be sufficient to defeat the application of both the discovery rule and fraudulent concealment as doctrines by which the statutes of limitations may be circumvented. Because the information filed with the TRC is extensive, this will be significant in oil and gas cases. The case is also significant because of its holding that royalty checks are enough to establish cotenant ouster in a lease termination case. The continuation of payments under a terminated lease will almost certainly and always be described as royalty payments. The case continues the trend of the court to enforce statutes of limitation and to resist finding enforceable lease termination long after the date of termination, notwithstanding that a lease is a determinable fee.